If you sell digital products — software subscriptions, online courses, downloadable templates, stock photos, e-books, or any other digital deliverable — you may owe sales tax in states you've never set foot in. This changed significantly after the Supreme Court's 2018 South Dakota v. Wayfair decision, and many freelancers and solopreneurs still don't know they have exposure.
Here is what you need to understand.
What Wayfair Changed
Before Wayfair, states could only require you to collect sales tax if you had a physical “nexus” there — a store, office, employee, or warehouse. Remote sellers were largely off the hook.
South Dakota v. Wayfair (2018) changed that. The Supreme Court ruled that states can require sales tax collection based on economic nexus — meaning a certain volume of sales to customers in a state, regardless of physical presence.
Most states have since adopted economic nexus thresholds. The most common: $100,000 in sales or 200 transactions in a state in the prior or current calendar year. Once you cross that threshold, you're required to register with the state and collect tax.
For most freelancers selling services to a small number of clients, this may not be relevant. But if you sell digital products at scale — courses, templates, plugins, subscriptions — the thresholds come up faster than you'd think.
Which States Tax Digital Products?
Here is where it gets complicated: states define “taxable digital products” differently, and some explicitly exempt them.
States that generally tax SaaS and digital products:
- New York — Taxes SaaS as “information services” and “prewritten software.” One of the most aggressive states on digital taxation.
- Texas — Taxes SaaS and data processing services. “Custom software” may be exempt but prewritten software (including SaaS) is not.
- Pennsylvania — Taxes “computer services” including most SaaS.
- Washington — Taxes SaaS under B&O tax (gross receipts, not income tax), plus retail sales tax applies to “digital automated services.”
- West Virginia — Taxes digital products and SaaS.
- Connecticut — Taxes SaaS and specified digital products.
- Ohio — Taxes “electronic information services” which can include SaaS.
- South Carolina — Taxes SaaS under its general sales tax statute.
- Tennessee — Taxes SaaS and specified digital products.
- Hawaii — Taxes virtually everything, including digital services, under its GET (general excise tax).
States that generally do NOT tax digital services:
- California — Does not tax SaaS, but does tax digital products sold at retail (like downloaded software). The line between “service” and “product” is where it gets fuzzy.
- Florida — Does not tax SaaS. Does tax certain digital downloads.
- Illinois — Exempts SaaS but taxes other digital products.
- Virginia — Does not tax SaaS.
- New Jersey — Does not currently tax SaaS.
The nuance: A “course” vs “service” distinction matters. A live coaching session billed hourly is a service. A pre-recorded course delivered via an LMS is closer to a digital product sale. Different states draw the line differently.
Online Courses Specifically
Online courses occupy an interesting position. They contain both content (potentially taxable as digital products) and education (often exempt). State treatment varies:
- New York: Generally taxes digital products, which could include pre-recorded courses. Live/synchronous instruction is more likely to be treated as an exempt service.
- Texas: Educational services are generally exempt, but pre-recorded “canned” digital content may be taxable.
- Most states: Professional development and educational courses sold to individuals are often exempt or in a gray zone. Check your specific state and consult a state tax professional before assuming exemption.
The practical guidance: if you're selling under $10,000/year in a given state, the risk/reward of sales tax registration is low priority. Once you're approaching $50,000+ in digital product sales in a state, it's worth getting clarity.
What to Do If You Have Exposure
Step 1: Identify where you have nexus
Check your sales by state. If you use Stripe, Stripe Tax or a report from your Stripe dashboard can give you a state-by-state breakdown. Do you cross $100,000 or 200 transactions in any state?
Step 2: Determine taxability in those states
For each state where you have nexus, determine whether your specific product is taxable. This is state-specific and sometimes category-specific. States publish guidance documents — look for “sales tax and software” or “sales tax and digital products” on the state revenue department website.
Step 3: Register if required
If you have nexus and your product is taxable, you need to register for a sales tax permit in that state. You cannot legally collect sales tax without a permit, and you generally should not collect it before registering.
Step 4: Automate collection
Don't try to do this manually. Use a platform that handles sales tax automatically:
- Stripe Tax — integrates directly with Stripe, calculates and collects the correct rate
- TaxJar — automates collection, reporting, and filing
- Avalara — enterprise-grade, typically used by larger sellers
Most e-commerce platforms (Shopify, Gumroad, Teachable, Kajabi) now handle sales tax collection on marketplace facilitator principles in some states.
Marketplace Facilitator Laws
This is important if you sell through platforms like Gumroad, Etsy, Teachable, or Udemy. Most states have “marketplace facilitator” laws that require the platform itself to collect and remit sales tax on your behalf. If you sell exclusively through such platforms, you may have no sales tax obligation — the platform handles it.
If you sell both through platforms AND directly from your own website, you may owe sales tax on your direct sales but not the platform sales.
The Penalty Risk
Failing to collect and remit sales tax is not an income tax issue — it's a separate obligation. Penalties vary by state but typically include:
- Unpaid tax (you're on the hook for the amount you should have collected)
- Penalties: often 10–25% of the unpaid tax
- Interest: typically 1–2% per month on unpaid balances
Voluntary disclosure programs (VDAs) exist in most states and allow you to come forward, pay back taxes, and negotiate reduced penalties. If you've had exposure for years and haven't registered, a VDA is usually better than waiting to be discovered.
The Practical Threshold
For most freelancers selling digital products under six figures per year across many states, the practical risk is low until you cross economic nexus thresholds. Focus on the states where you have the most customers and highest volume first.
A rough rule of thumb: if you're selling $100,000+ per year in total digital product revenue to consumers across the country, it's worth a consultation with a state tax attorney or CPA who specializes in sales tax. The exposure is real, and professional guidance costs less than the penalties.
Use the Self-Employment Tax Calculator to understand your federal SE tax liability, and keep in mind that state sales tax is an entirely separate obligation on top of income and self-employment taxes.